THE IMPACT OF FOREIGN CURRENCY TRANSLATION METHOD CHANGE ON THE ACCURACY OF THE FINANCIAL ANALYSTS' EARNINGS FORECASTS (FOREIGN CURRENCY TRANSLATION, FASB 52)

Prior research has shown that the change in accounting standards may have distributional consequences. Investors prefer the accounting methods that facilitate more accurate predictions of future earnings--investors' welfare is a positive function of their ability to predict future earnings. This study uses the financial analysts' earnings forecasts as a proxy for the unobservable market expectations, to test the hypothesis that the change in foreign currency translation rule from FAS8 to FAS52 has improved earnings forecasting. Forecast errors of a matched sample of mutinational companies (MNCs) and domestic companies (DCs) for the period 1978-80 (FAS8) is compared with the forecast errors of the same companies during 1983-85 period (FAS52). The profile analysis of the data reveals results opposite to what was expected--forecast accuracy deteriorated after the change in foreign currency translation standard. However, since the change in forecast errors of the MNCs parallels the change in forecast errors of the DCs (control group) one cannot attribute the worsening of the forecast accuracy to a change in a single accounting standard.